Part B Q2. Suppose a company who has an asset of 1,000,000 USD in the next 90 days considers to invest on an FX option. Suppose todays spot exchange rate is exchange rate 8.7 and TL interest rate is 18.5% and USD interest rate is 1.5%. further suppose dollar/Tl return volatility (yearly) is 14%.

a.) What are the values for put and call options by assuming exercise price is also 8.8 (use Black-Scholes model)

b.) What is the value of the puts delta? How do you interpret this number?

c.) Suppose this company wants to hedge its fx risk for the next 90 days. What type of option can this company invest on? (maturity, notional amount and type of the option)

d.) Show what happens to this companys fx debt at the end of 3 months when dollar/TL sees 7.7 8.2 levels. How does your option help to hedge this risk? Is it worth taking the insurance

e.) regardless of their position if the above company thinks that the $/TL volatility will increase in the next 3 months. What type of option position they can have? Calculate an initial investment cost of one of these option strategies? What will be level of $/TL range (ie. Min and max of $/TL) in 90 days for this strategy to be profitable

f.) make a butterfly portfolio on dollar/Tl options. Show a graph when exchange rate is 7 7.2 7.4 7.6,8.6,8.8,..9.6

g.) make a straddle position. Price it. Show its profit and loss diagram. What is the delta of straddle position?

i.) what should be the minimum and maximum usd/Tl rate for your straddle to be profitable?